The Senate passed by unanimous consent the No Tax on Tips Act, a bill that would create a federal income tax deduction of up to $25,000 a year for cash tips for eligible employees in jobs that “traditionally and customarily” receive tips as defined by the Treasury Secretary beginning in 2025. Eligibility is also limited to those making less than $160,000 in 2025, adjusted annually for inflation.
$160,000‼️ you can earn that much and your tips are tax free?
Why tips?
The following is a statement from Maya MacGuineas, president of the Committee for a Responsible Federal Budget:
Exasperated doesn’t even begin to do it. This most recent vote to deliver “no tax on tips” is especially egregious, since it shows that the only thing the United States Senate appears to be able to agree on unanimously is that they want to deliver more tax cuts and totally disregard the potential impact on the national debt, which we estimate could be upwards of $100 billion or more over a decade.
Not only is this policy expensive, but it also benefits one specific group and is not how we should be going about designing tax policy. The whole point of tax reform is to reduce carveouts and expand the tax base, not narrow it further by giving specific industries handouts. This goes a total step in the opposite direction of simplicity.
QUINNSCOMMENTARY 
I wonder if this will have any effect on the amount that customers tip, if servers are seen as getting an unfair tax advantage? (Regardless of the actual numbers of course.)
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Well, normally, I would agree that this is “sleeves from the vest” – that nobody makes that kind of money who is earning tips for services. However, you have to wonder where $160,000 came from. I think it is likely focused on bartenders and waitresses in big cities, exclusive restaurants, where meals typically cost $100+, so that on a good night, a bartender or waitress can earn $300+ in tips. Or, it could be the dancers in adult locations? Or, who knows. Perhaps it is tied to the IRC 414(q) definition of Highly Compensated Employee (for 401k purposes)?
I agree with Maya that the goal should be elimination of exceptions in the tax code. Unfortunately, she never goes far enough. She wants to protect Congress’ ability to favor stuff like family creation, and homeownership, etc. That is, she has her own favorites.
Not me. When it comes to income taxes, you earn a dollar, you pay $.17 to the federal government. You earn $2 you pay $.34. That includes any dollar earned and realized from investments. Existing accumulated tax deferred assets in retirement plans would be taxed as realized, however, I would also offer a one time, 10 year averaging option (with a plan loan to finance the withholding taxes due), for anyone who wants to convert existing retirement benefits to a Roth basis.
Health spending is a major issue. To resolve it, I would add an individual mandate for basic health coverage with a modest attachment point for stop loss, perhaps $25,000 per person, per year. This would include everyone in Medicare and everyone in Medicaid, the VA, etc. The stop loss would be funded by taxpayers and limit reimbursement to Medicare allowable amounts – because at some point, it is inappropriate for individuals or employers to shoulder catastrophic losses – those are better dealt with by society, because the data suggest 5% of the population incurs more than 2/3rds of all medical expenses. An employer could shoulder the cost of basic coverage, if they imputed the spending as income to the individual. Where individuals who do not source basic coverage from an employer sponsored plan, they would be defaulted into an exchange option (cannot opt out, can only change the option) and billed the premium. The premium would be due as part of withholding taxes – either through the employer or quarterly estimates. Failure to pay would accumulate a debt to society – like any other taxes due and unpaid.
Medicare HI taxes would be shifted to the Social Security trust fund to deal with the immediate underfunding.
Every person is an individual. No deductions, no exemptions, no loopholes. That would require elimination of pre-tax/tax free company contributions (tax preferences) for retirement, health care and other corporate benefits. I would allow retention of Roth features.
Not sure why I spend time on this – it is obvious where we are going, especially today when you look at the yields in the bond markets, and the downgrading of Treasury debts.
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Al Lindquist
Good stuff Jack–probably too complex for most folks to grasp–these are the type of ideas we need to flesh out.
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I don’t know where the no tax on tips idea came from. It seems odd and a lot of the people who depend on tips don’t really make enough to be noticeable on the tax rolls. The Waffle House waitress in Georgia probably doesn’t pay income tax anyway. So as a big tax loss it doesn’t rank up there. It just seems odd to me. But everyone knew that tips were flying under the radar and IRS could spend more trying to collect than the collections amounted to.
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Al Lindquist:
didn’t both our candidates propose this? hey, if you want to win Nevada you need to buy some votes and this seemed a good way.
Maya has the right idea but we do foolish things–just look at how simple Social Security was when established and then we decided to add ornaments, like it was a Christmas tree, so now retirement income is just one of the many benefits provided by this program.
There is no pill for stupid!!!
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